Bill Sharpe's preferred portfolio

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HootingSloth
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Re: Bill Sharpe's preferred portfolio

Post by HootingSloth »

djm2001 wrote: Wed May 19, 2021 5:05 pm
watchnerd wrote: Wed May 19, 2021 4:32 pm
guppyguy wrote: Wed May 19, 2021 4:31 pm
djm2001 wrote: Sun May 02, 2021 11:34 am
For most people, typically the portfolio is the free variable in the above equation. So we should skew our portfolio based on our intrinsic risk exposure. IMO that would be a principled way to do factor investing (as opposed to just saying, "I have high risk tolerance (whatever that means...), and so I can bet on small/value stocks").
This is the problem I see with any factor tilt. How does one quantify an adequate amount of tilt in any direction? There seems to be no rational or consensus for what might constitute market based "optimum" tilt, just the behavioral consideration, which while real is exactly the thing one would want to remove from an investing decision. It's either all tilt or none at all perhaps.

I'm speaking from personal experience.... now how do I incorporate my 25% SCV tilt with a floating GMP??? :D
I think tilting is philosophically incompatible.

Tilting is an active decision to pivot away from market allocations.
I would agree that tilting based on pure speculation (e.g., "I believe tech will outperform, so I'll tilt toward that") is philosophically incompatible. But tilting to balance out one's own personal/innate risks is logical and compatible -- and indeed to not do so would be illogical and incompatible. For example... Clearly not everyone's portfolio can be tilted toward SCV relative to the average (market portfolio). There has to be an equal amount of aggregate tilt away from SCV as there is toward SCV. A logical reason to bet against SCV would be if one already has intrinsic SCV exposure (e.g., as an employee of an SCV company) and need to balance out that risk by tilting against it in their portfolio in order to get back to the (allegedly efficient) market portfolio risk allocation.

Ignoring one's own mortgage and job compensation and job sector and retirement horizon, and not factoring those into one's portfolio allocation seems like a mental accounting / bucketing trap, just as much as it would be to ignore one's Roth IRA when considering one's brokerage allocation. Yes, I admit it gets fuzzy when quantifying one's own risk exposure, and finding assets that can balance out that risk.
This mirrors my thinking on factor investing. Fortunately or unfortunately, I have not been able to find a way to understand the nature of the risks associated with particular factors well enough to reach a firm conviction that my personal/innate risk profile differs from the average market participant. You can read different theories about the risk-based explanations of different factors (e.g. value companies more exposed to leverage and financial crises), but the ones I have found have been too vague to be actionable. So, in practice, I don't tilt towards or away from any factors, even though I think it is compatible with a global market portfolio approach in theory.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

watchnerd wrote: Fri May 21, 2021 11:21 am Klipinger's happened to have an article on using Black Litterman modeling to determine that amount of crypto to add to a global stock / bond portfolio:

https://www.kiplinger.com/investing/602 ... 0portfolio.

I'm not intending to dig into the crypto angle due to recent Bogleheads bands on crypto discussions, but I did find it interesting that the global stock / bond ratio they're using to represent the global market is a different weighting.
In early 2021, the global market for stocks totaled $95 trillion and the global bonds market reached $105 trillion.
The base portfolio in this article is:

Stocks: 47%
Bonds: 52.5%

Unforunately, the data source wasn't cited so I don't know why there is such a large discrepancy.
The article is almost surely using the SIFMA numbers (see page 7 of the link which shows $95T equity, $105T bonds). SIFMA includes a huge chunk of assets that are not free-float (e.g., restricted shares, private placement equity and debt). Hence the discrepancy from free-float market caps.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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watchnerd
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

djm2001 wrote: Fri May 21, 2021 1:56 pm
watchnerd wrote: Fri May 21, 2021 11:21 am Klipinger's happened to have an article on using Black Litterman modeling to determine that amount of crypto to add to a global stock / bond portfolio:

https://www.kiplinger.com/investing/602 ... 0portfolio.

I'm not intending to dig into the crypto angle due to recent Bogleheads bands on crypto discussions, but I did find it interesting that the global stock / bond ratio they're using to represent the global market is a different weighting.
In early 2021, the global market for stocks totaled $95 trillion and the global bonds market reached $105 trillion.
The base portfolio in this article is:

Stocks: 47%
Bonds: 52.5%

Unforunately, the data source wasn't cited so I don't know why there is such a large discrepancy.
The article is almost surely using the SIFMA numbers (see page 7 of the link which shows $95T equity, $105T bonds). SIFMA includes a huge chunk of assets that are not free-float (e.g., restricted shares, private placement equity and debt). Hence the discrepancy from free-float market caps.
I was suspecting it was something float related.

Thanks for confirming.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

guppyguy wrote: Fri May 21, 2021 11:14 am Does the name “N-fund” have any other significance then just a variable number of components making up the GMP? First I’ve seen of it on BH.
Oops, I just made up the name "N-Fund". I got tired of renaming it from 5-Fund to 6-Fund, etc. every time I added a new non-overlapping asset class to it.
guppyguy wrote: Fri May 21, 2021 11:14 am I don’t completely agree with the asset inclusion past stocks and bonds. Seems like one is just cherry picking micro-asset classes based on what’s popular, which is contrary to Sharpe’s thesis. Just an observation, not a judgement. Also, if one wanted a small SWR of their GMP in retirement it would have to be very large (3M plus) to precisely account for a .17% allocation with non-fractional ETF shares. Still mulling over junk bonds, TIPS, and munis.
What did you mean by "Sharpe's thesis"? My interpretation of Sharpe's thesis is to buy everything at free-float market weight, which definitely involves buying what's popular.

But you're right -- in expectation, there is diminishing returns for smaller slices. Draw the line at where it makes sense for your personal situation. It depends on the size of your portfolio, your desire for simplicity, and your personal circumstances (e.g., the choice of muni bonds depends on your tax rate and how your state taxes muni bonds). Personally, I bought the smaller slices (junk, TIPS, muni) only after my portfolio grew to the point where investing in the smaller slices made sense and became cost effective.

I'm still mulling over gold and crypto. :) Besides the investment complexity, I'm torn because I find the "these don't produce anything" argument tempting at first glance. On the other hand, I feel that the "produce-nothing" argument is possibly subjective and naive -- there are probably hundreds of companies in VTSAX whose business model and value proposition I don't personally understand or agree with, but I blindly buy them anyway.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

HootingSloth wrote: Fri May 21, 2021 11:29 am
djm2001 wrote: Wed May 19, 2021 5:05 pm I would agree that tilting based on pure speculation (e.g., "I believe tech will outperform, so I'll tilt toward that") is philosophically incompatible. But tilting to balance out one's own personal/innate risks is logical and compatible -- and indeed to not do so would be illogical and incompatible. For example... Clearly not everyone's portfolio can be tilted toward SCV relative to the average (market portfolio). There has to be an equal amount of aggregate tilt away from SCV as there is toward SCV. A logical reason to bet against SCV would be if one already has intrinsic SCV exposure (e.g., as an employee of an SCV company) and need to balance out that risk by tilting against it in their portfolio in order to get back to the (allegedly efficient) market portfolio risk allocation.

Ignoring one's own mortgage and job compensation and job sector and retirement horizon, and not factoring those into one's portfolio allocation seems like a mental accounting / bucketing trap, just as much as it would be to ignore one's Roth IRA when considering one's brokerage allocation. Yes, I admit it gets fuzzy when quantifying one's own risk exposure, and finding assets that can balance out that risk.
This mirrors my thinking on factor investing. Fortunately or unfortunately, I have not been able to find a way to understand the nature of the risks associated with particular factors well enough to reach a firm conviction that my personal/innate risk profile differs from the average market participant. You can read different theories about the risk-based explanations of different factors (e.g. value companies more exposed to leverage and financial crises), but the ones I have found have been too vague to be actionable. So, in practice, I don't tilt towards or away from any factors, even though I think it is compatible with a global market portfolio approach in theory.
Yeah, despite all the theory, most things are so hard to quantify and predict in practice that really the only "tilting" the average investor can/should do is to increase their bond exposure from zero/low to market weight (... or beyond?) as their human capital is depleted over time (i.e., as they get closer to retirement). The stock / bond ratio is just another kind of factor tilting (junk bonds are illustrative example, being somewhere in the middle of the spectrum and exposed to significant levels of both equity and debt risks), and is probably the most important factor tilt.
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Re: Bill Sharpe's preferred portfolio

Post by HootingSloth »

djm2001 wrote: Fri May 21, 2021 2:32 pm I'm still mulling over gold and crypto. :) Besides the investment complexity, I'm torn because I find the "these don't produce anything" argument tempting at first glance. On the other hand, I feel that the "produce-nothing" argument is possibly subjective and naive -- there are probably hundreds of companies in VTSAX whose business model and value proposition I don't personally understand or agree with, but I blindly buy them anyway.
I have left out gold and crypto, and commodities more broadly, but based on an argument that I think is a bit different than a "produce nothing" argument. It seems to me that the fundamental value of these assets comes not from any legal entitlements associated with ownership (e.g., rights to interest and distributions for bonds and stocks) but from the fact that they may be actually used for something. In gold's case, this utility seems to be primarily as a "store of value" (plus, to a much lesser extent certain industrial and decorative uses). Each cryptocurrency has its own potential use case.

I think that I can come to a firm conviction about when and how the usefulness of gold/crypto to me differs from the usefulness to the average market participant because, presently, I do not find that I have a use for any of them (except, perhaps, some jewelry for my wife.) When I have a firm conviction that my personal circumstances differ from the average market participant, I do not mind diverging from the global market portfolio.

At a higher net worth, I could imagine feeling there is some utility to holding small amounts of physical gold that might be grabbed quickly for use in certain relatively unlikely emergencies. Just for the sake of illustration and not to engage in a discussion about the merits of any particular cryptocurrencies, I could see a USB hard wallet of some type of cryptocurrency as serving a similar and complementary purpose at a later time. And perhaps I will find cryptocurrencies useful for some other reason later as well. But, for now, I am content to leave them out.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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Re: Bill Sharpe's preferred portfolio

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HootingSloth wrote: Fri May 21, 2021 3:07 pm and commodities more broadly
FWIW, I tried to figure out how big the 'retail investor commodity market' is (e.g. people just holding a broad basket portfolio of commodities as part of a retail portfolio), as opposed to the utility commodity market where actors are buying commodities futures for real reasons (e.g. Budweiser hedging corn prices in order to make beer).

I added up the AUM of the various commodity funds listed on Morningstar and it roughed out to about $87B

So if ETF-tradeable gold is already questionable in terms of being too small to bother at $200B / 0.17%, retail commodity funds are even smaller.

Something like .0007
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Re: Bill Sharpe's preferred portfolio

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watchnerd wrote: Fri May 21, 2021 3:19 pm
HootingSloth wrote: Fri May 21, 2021 3:07 pm and commodities more broadly
FWIW, I tried to figure out how big the 'retail investor commodity market' is (e.g. people just holding a broad basket portfolio of commodities as part of a retail portfolio), as opposed to the utility commodity market where actors are buying commodities futures for real reasons (e.g. Budweiser hedging corn prices in order to make beer).

I added up the AUM of the various commodity funds listed on Morningstar and it roughed out to about $87B

So if ETF-tradeable gold is already questionable in terms of being too small to bother at $200B / 0.17%, retail commodity funds are even smaller.

Something like .0007
I'll let you get away with leaving that one out, even if you don't believe the broader distinction I'm making. At least until you're a billionaire :D
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

HootingSloth wrote: Fri May 21, 2021 3:07 pm
djm2001 wrote: Fri May 21, 2021 2:32 pm I'm still mulling over gold and crypto. :) Besides the investment complexity, I'm torn because I find the "these don't produce anything" argument tempting at first glance. On the other hand, I feel that the "produce-nothing" argument is possibly subjective and naive -- there are probably hundreds of companies in VTSAX whose business model and value proposition I don't personally understand or agree with, but I blindly buy them anyway.
I have left out gold and crypto, and commodities more broadly, but based on an argument that I think is a bit different than a "produce nothing" argument. It seems to me that the fundamental value of these assets comes not from any legal entitlements associated with ownership (e.g., rights to interest and distributions for bonds and stocks) but from the fact that they may be actually used for something. In gold's case, this utility seems to be primarily as a "store of value" (plus, to a much lesser extent certain industrial and decorative uses). Each cryptocurrency has its own potential use case.
Both physical gold and crypto are bearer assets, which is certainly categorically different than stocks and bonds.

FWIW we did add market weigh in ETF gold (GLDM) to our portfolio, but even at our portfolio size, it's a pretty silly amount of gold -- at today's prices, if we held it physically, it's only like 4.5 ounces.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

watchnerd wrote: Fri May 21, 2021 3:19 pm
HootingSloth wrote: Fri May 21, 2021 3:07 pm and commodities more broadly
FWIW, I tried to figure out how big the 'retail investor commodity market' is (e.g. people just holding a broad basket portfolio of commodities as part of a retail portfolio), as opposed to the utility commodity market where actors are buying commodities futures for real reasons (e.g. Budweiser hedging corn prices in order to make beer).

I added up the AUM of the various commodity funds listed on Morningstar and it roughed out to about $87B

So if ETF-tradeable gold is already questionable in terms of being too small to bother at $200B / 0.17%, retail commodity funds are even smaller.

Something like .0007
Nice detective work! Thank you, for now I never have to think about commodities again! :beer
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

watchnerd wrote: Fri May 21, 2021 3:28 pm
HootingSloth wrote: Fri May 21, 2021 3:07 pm
djm2001 wrote: Fri May 21, 2021 2:32 pm I'm still mulling over gold and crypto. :) Besides the investment complexity, I'm torn because I find the "these don't produce anything" argument tempting at first glance. On the other hand, I feel that the "produce-nothing" argument is possibly subjective and naive -- there are probably hundreds of companies in VTSAX whose business model and value proposition I don't personally understand or agree with, but I blindly buy them anyway.
I have left out gold and crypto, and commodities more broadly, but based on an argument that I think is a bit different than a "produce nothing" argument. It seems to me that the fundamental value of these assets comes not from any legal entitlements associated with ownership (e.g., rights to interest and distributions for bonds and stocks) but from the fact that they may be actually used for something. In gold's case, this utility seems to be primarily as a "store of value" (plus, to a much lesser extent certain industrial and decorative uses). Each cryptocurrency has its own potential use case.
Both physical gold and crypto are bearer assets, which is certainly categorically different than stocks and bonds.

FWIW we did add market weigh in ETF gold (GLDM) to our portfolio, but even at our portfolio size, it's a pretty silly amount of gold -- at today's prices, if we held it physically, it's only like 4.5 ounces.
Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
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Re: Bill Sharpe's preferred portfolio

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guppyguy wrote: Fri May 21, 2021 4:55 pm

Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
I just have no use for gold outside of the unique attributes it brings in an MPT context.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

guppyguy wrote: Fri May 21, 2021 4:55 pm
watchnerd wrote: Fri May 21, 2021 3:28 pm FWIW we did add market weigh in ETF gold (GLDM) to our portfolio, but even at our portfolio size, it's a pretty silly amount of gold -- at today's prices, if we held it physically, it's only like 4.5 ounces.
Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
Important to note that physical gold bars/coins investment is a not tracked by the gold ETF market cap discussed earlier in the thread. The market cap of physical bars/coins is more than 10x that of gold ETF market cap (40.6k tonnes bars/coins vs 3.8k tonnes ETF as of end of 2020 according to World Gold Council -- details require a free login). So the allocation to physical gold would be closer to 2% of the portfolio if we allowed for the possibility of buying and securing physical gold ourselves, and watchnerd would need maybe 45oz+ of gold bars/coins (in addition to 4.5oz-worth of gold ETF). I didn't include bars/coins in the spreadsheet since I was restricting to publicly investable securities and other "armchair investable" assets. But a few oz (or even lb) of gold is probably not too onerous to secure, store, and transport. So maybe I should update the spreadsheet to include physical bars/coins. edit: Added gold bars/coins to the MktCaps tab here.
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Fri May 21, 2021 8:29 pm
guppyguy wrote: Fri May 21, 2021 4:55 pm
watchnerd wrote: Fri May 21, 2021 3:28 pm FWIW we did add market weigh in ETF gold (GLDM) to our portfolio, but even at our portfolio size, it's a pretty silly amount of gold -- at today's prices, if we held it physically, it's only like 4.5 ounces.
Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
Important to note that physical gold bars/coins investment is a not tracked by the gold ETF market cap discussed earlier in the thread. The market cap of physical bars/coins is more than 10x that of gold ETF market cap (40.6k tonnes bars/coins vs 3.8k tonnes ETF as of end of 2020 according to World Gold Council -- details require a free login). So the allocation to physical gold would be closer to 2% of the portfolio if we allowed for the possibility of buying and securing physical gold ourselves, and watchnerd would need maybe 45oz+ of gold bars/coins (in addition to 4.5oz-worth of gold ETF). I didn't include bars/coins in the spreadsheet since I was restricting to publicly investable securities and other "armchair investable" assets. But a few oz (or even lb) of gold is probably not too onerous to secure, store, and transport. So maybe I should update the spreadsheet to include physical bars/coins. edit: Added gold bars/coins to the MktCaps tab here.
I think it's correct to only count securitized gold.

Things have to be liquid and tradable.

Otherwise, global real estate alone would swamp almost all other assets.
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Fri May 21, 2021 2:32 pm
guppyguy wrote: Fri May 21, 2021 11:14 am Does the name “N-fund” have any other significance then just a variable number of components making up the GMP? First I’ve seen of it on BH.
Oops, I just made up the name "N-Fund". I got tired of renaming it from 5-Fund to 6-Fund, etc. every time I added a new non-overlapping asset class to it.
guppyguy wrote: Fri May 21, 2021 11:14 am I don’t completely agree with the asset inclusion past stocks and bonds. Seems like one is just cherry picking micro-asset classes based on what’s popular, which is contrary to Sharpe’s thesis. Just an observation, not a judgement. Also, if one wanted a small SWR of their GMP in retirement it would have to be very large (3M plus) to precisely account for a .17% allocation with non-fractional ETF shares. Still mulling over junk bonds, TIPS, and munis.
What did you mean by "Sharpe's thesis"? My interpretation of Sharpe's thesis is to buy everything at free-float market weight, which definitely involves buying what's popular.
Only in that he clearly desires implementation in a single fund, if possible. Continuing to add asset classes re-introduces complexity and might be an over approximation for exposures investors already have in other forms (own our house for real estate, wife has physical jewelry, etc etc). On the other hand, I do think you make a very good case most of the assets in the N-fund.
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Re: Bill Sharpe's preferred portfolio

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This post documents the monthly return and asset class weights as of April 30, 2021 of the Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The April 2021 return of the Global Stock-and-Bond Portfolio was:
  • Global Stock-and-Bond Portfolio: ((59.90% X 4.18% (global stocks)) + (40.10% X 0.30% (global bonds))) = 2.62%
    • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
    • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return
As of April 30, 2021 the weights were:
  • Global stocks: $72,727,674 million USD Market cap -- 60.56%
    • FTSE Global All Cap Index (GEISLMS) -- Net MCap
  • Global bonds: $47,357,120 million USD Market cap -- 39.44%
    • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value
For practical investing purpose I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its April 2021 return was 2.73%.
Last edited by longinvest on Sun May 23, 2021 7:00 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

Just curious if anybody has looked at constructing the WBS using MSCI index and iShare products?

Its been awhile since I've looked at it but I don't think MSCI index market cap information is not as readily available as FTSE.

Also, anybody allocating down to the Muni level? It would be about a wash for me based on our tax bracket but would require an extra contribution to our taxable account to implement. Its a very small % of the market portfolio, just curious if it was really essential from a purely theoretical overall market allocation perspective (non-individual).

Regards-

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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

guppyguy wrote: Sat May 22, 2021 5:05 pm Just curious if anybody has looked at constructing the WBS using MSCI index and iShare products?

Its been awhile since I've looked at it but I don't think MSCI index market cap information is not as readily available as FTSE.
MSCI World Index Apr 30 factsheet:
  • Number of constituents: 1,583
  • Mkt Cap ($M): 56,221,708.67
FTSE Global All Cap Index (tracked by VT) Apr 30 factsheet:
  • Number of constituents: 9,214
  • Mkt Cap ($M): 72,727,674
(CRSP Total Stock Market Index + FTSE Global All Cap ex-US (tracked by VTI + VXUS, respectively) increases the coverage even further -- mainly in US small cap.)

Furthermore, MSCI World Index covers only large- and mid cap, so it's not just dropping 20%+ market cap coverage, but doing so in a biased way by systematically leaving out small cap.
guppyguy wrote: Sat May 22, 2021 5:05 pm Also, anybody allocating down to the Muni level? It would be about a wash for me based on our tax bracket but would require an extra contribution to our taxable account to implement. Its a very small % of the market portfolio, just curious if it was really essential from a purely theoretical overall market allocation perspective (non-individual).
At 0.66% allocation in the N-Fund portfolio and with 0.6+ monthly correlation with US TBM, additional diversification benefit of munis over TBM is small. Worth the trouble only if your portfolio is large ($1.5M+ maybe) and/or if munis provide tax benefit to your situation (in which case, you might even over-allocate to munis). In the past, it made sense for my situation (high enough tax rate, large enough portfolio, ran out of tax-sheltered space for bonds) to hold state-specific munis well beyond market weight. My situation has since changed, and now I'm opportunistically (i.e., when I can sell my munis for a loss) reverting back to market weight.
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Re: Bill Sharpe's preferred portfolio

Post by invest2bfree »

watchnerd wrote: Fri May 21, 2021 5:01 pm
guppyguy wrote: Fri May 21, 2021 4:55 pm

Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
I just have no use for gold outside of the unique attributes it brings in an MPT context.
Have you looked at how much performance change that 2% allocation will make to your portfolio?

As per my calculation it would be very negligible in my view.


So my take is you have a minimum 20% or nothing. Gold does protect small investors under 10million net worth from black swan type events.

You did very well last 21 years even beating stocks with half the risk with 20% gold and 20% treasuries-

https://www.portfoliovisualizer.com/bac ... tion3_1=20
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

invest2bfree wrote: Sun May 23, 2021 9:03 am
watchnerd wrote: Fri May 21, 2021 5:01 pm
guppyguy wrote: Fri May 21, 2021 4:55 pm

Did it cross your mind to do just that, buy 4.5 ounces in gold and store it some place safe? At least then your not paying an ER and it’s value will float along with the rest of your GMP especially as it does produce any income. I’m half-joking of course :D
I just have no use for gold outside of the unique attributes it brings in an MPT context.
Have you looked at how much performance change that 2% allocation will make to your portfolio?

As per my calculation it would be very negligible in my view.


So my take is you have a minimum 20% or nothing. Gold does protect small investors under 10million net worth from black swan type events.

You did very well last 21 years even beating stocks with half the risk with 20% gold and 20% treasuries-
2% in crypto actually has a pretty surprising impact.

I don't have 2% in gold.

I have 0.17% in gold. The impact is miniscule.

As for 20% in gold, that's not the market weight, even if one includes physical gold, so philosophically out of bounds.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

djm2001 wrote: Sun May 23, 2021 8:00 am
guppyguy wrote: Sat May 22, 2021 5:05 pm Just curious if anybody has looked at constructing the WBS using MSCI index and iShare products?

Its been awhile since I've looked at it but I don't think MSCI index market cap information is not as readily available as FTSE.
MSCI World Index Apr 30 factsheet:
  • Number of constituents: 1,583
  • Mkt Cap ($M): 56,221,708.67
FTSE Global All Cap Index (tracked by VT) Apr 30 factsheet:
  • Number of constituents: 9,214
  • Mkt Cap ($M): 72,727,674
(CRSP Total Stock Market Index + FTSE Global All Cap ex-US (tracked by VTI + VXUS, respectively) increases the coverage even further -- mainly in US small cap.)

Furthermore, MSCI World Index covers only large- and mid cap, so it's not just dropping 20%+ market cap coverage, but doing so in a biased way by systematically leaving out small cap.
guppyguy wrote: Sat May 22, 2021 5:05 pm Also, anybody allocating down to the Muni level? It would be about a wash for me based on our tax bracket but would require an extra contribution to our taxable account to implement. Its a very small % of the market portfolio, just curious if it was really essential from a purely theoretical overall market allocation perspective (non-individual).
At 0.66% allocation in the N-Fund portfolio and with 0.6+ monthly correlation with US TBM, additional diversification benefit of munis over TBM is small. Worth the trouble only if your portfolio is large ($1.5M+ maybe) and/or if munis provide tax benefit to your situation (in which case, you might even over-allocate to munis). In the past, it made sense for my situation (high enough tax rate, large enough portfolio, ran out of tax-sheltered space for bonds) to hold state-specific munis well beyond market weight. My situation has since changed, and now I'm opportunistically (i.e., when I can sell my munis for a loss) reverting back to market weight.
Makes sense, I’m about 98% tax advantaged with 7 figures, so no need for bonds is taxable. So my line is drawn at about N=6. Will probably use SCHP instead of TIP (lower ER, same index). Ibonds and HYSA are my riskless asset.
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Re: Bill Sharpe's preferred portfolio

Post by Ferdinand2014 »

djm2001 wrote: Sun May 23, 2021 8:00 am
guppyguy wrote: Sat May 22, 2021 5:05 pm Just curious if anybody has looked at constructing the WBS using MSCI index and iShare products?

Its been awhile since I've looked at it but I don't think MSCI index market cap information is not as readily available as FTSE.
MSCI World Index Apr 30 factsheet:
  • Number of constituents: 1,583
  • Mkt Cap ($M): 56,221,708.67
FTSE Global All Cap Index (tracked by VT) Apr 30 factsheet:
  • Number of constituents: 9,214
  • Mkt Cap ($M): 72,727,674
(CRSP Total Stock Market Index + FTSE Global All Cap ex-US (tracked by VTI + VXUS, respectively) increases the coverage even further -- mainly in US small cap.)

Furthermore, MSCI World Index covers only large- and mid cap, so it's not just dropping 20%+ market cap coverage, but doing so in a biased way by systematically leaving out small cap.
It is 15% or less not 20% or more. It also does not cover emerging markets - see below
guppyguy wrote: Sat May 22, 2021 5:05 pm Also, anybody allocating down to the Muni level? It would be about a wash for me based on our tax bracket but would require an extra contribution to our taxable account to implement. Its a very small % of the market portfolio, just curious if it was really essential from a purely theoretical overall market allocation perspective (non-individual).
At 0.66% allocation in the N-Fund portfolio and with 0.6+ monthly correlation with US TBM, additional diversification benefit of munis over TBM is small. Worth the trouble only if your portfolio is large ($1.5M+ maybe) and/or if munis provide tax benefit to your situation (in which case, you might even over-allocate to munis). In the past, it made sense for my situation (high enough tax rate, large enough portfolio, ran out of tax-sheltered space for bonds) to hold state-specific munis well beyond market weight. My situation has since changed, and now I'm opportunistically (i.e., when I can sell my munis for a loss) reverting back to market weight.
MSCI world index developed large and mid cap only - iShares URTH covers this index
MSCI EAFE index is developed ex US and Canada large and mid cap - iShares EFA covers this (they also have EAFE which is EAFE all cap)
MSCI ACWI index is global large and mid cap - iShares ACWI cover this index
MSCI ACWI IMI index is global all cap - SPDR's SPGM covers this index
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Sharpe's World Bond/Stock portfolio snapshot as of end of day, May 31, 2021:

4-fund:

Code: Select all

	 	 INDEX MKT CAP ($M)	%
VTSAX/VTI	 $ 42,983,231.38 	35.09%
VTIAX/VXUS	 $ 31,850,408.16 	26.00%
VBTLX/BND	 $ 22,337,346.74 	18.23%
VTABX/BNDX	 $ 25,335,087.68 	20.68%
2-fund:

Code: Select all

	 INDEX MKT CAP ($M)	%
VT	 $ 73,876,270.17 	60.76%
BNDW	 $ 47,708,177.45 	39.24%
Source: Real-time tracker.

Methodology: Same as before for stocks. For bonds, I changed the methodology based on the observation that the ratio of FTSE USBIG vs (FTSE WorldBIG - USBIG) market caps is significantly different (~5 percentage points) from BNDW's holdings of BND and BNDX, which implies that FTSE's bond indexes are not a good drop-in replacement for Bloomberg Barclays aggregate bond indexes. So I use the following alternate derivation instead.

Code: Select all

ftse_us_treasury_market_cap = $ 9,294.93 billion (source: FTSE USBIG factsheet for Apr 30, 2021; see the Index Profile table)
ftse_us_treasury_percentage = 37.85% (source: FTSE USBIG factsheet for Apr 30, 2021; see the Index Profile table)
ftse_agency_percentage = 0.99% (source: FTSE USBIG factsheet for Apr 30, 2021; see the Geographical and Quality Composition bar graph)
The combined US Treasury and Agency bond market cap is computed as follows:

Code: Select all

ftse_us_treasury_agency_market_cap = ftse_us_treasury_market_cap * (1 + ftse_agency_percentage / ftse_us_treasury_percentage)
                                   = $ 9,294.93 billion * (1 + 0.99 / 37.85)
                                   = $ 9,538.05 billion (as of Apr 30, 2021)
We now make a key assumption that Bloomberg Barclays and FTSE indexes agree on the combined market cap of US Treasury and Agency bonds.  Then we can then derive the Bloomberg Barclays index market caps as follows.

Code: Select all

bnd_treasury_agency_percent = 42.7% (source: BND portfolio & management page listed for Apr 30, 2021)
bndw_treasury_agency_percent = 20.0% (source: BNDW portfolio & management page listed for Apr 30, 2021)

bloomberg_us_agg_market_cap = ftse_us_treasury_agency_market_cap / bnd_treasury_agency_percent
                            = $ 9,538.05 billion / 0.427
                            = $ 22,337.35 billion (as of Apr 30, 2021)                         

bloomberg_global_agg_market_cap = ftse_us_treasury_agency_market_cap / bndw_treasury_agency_percent
                                = $ 9,538.05 billion / 0.2
                                = $ 47,690.24 billion (as of Apr 30, 2021)

bloomberg_global_agg_ex_usd_market_cap = bloomberg_global_agg_market_cap - bloomberg_us_agg_market_cap
                                        = $ 47,690.24 billion - 22,337.35 billion
                                        = $ 25,352.89 billion (as of Apr 30, 2021)
Data sources used above: Finally, we project these market caps forward using the price of BND, BNDX, and BNDW on the date of the factsheet and now. The forward project formula is:

Code: Select all

current_market_cap := snapshot_market_cap * current_tracker_price / snapshot_tracker_price
As it so happens, the resulting total global bond market cap ($47.7T as of Apr 30 snapshot) is extremely close to that from the old methodology which just took the FTSE WorldBIG market cap ($47.3T as of Apr 30 snapshot). This means that the change in methodology does not affect the stock vs bond ratio significantly (less than 0.2 percentage points). So the net effect of the change in methodology is that the US vs international bond ratio now more accurately tracks BNDW's holdings, while the stock vs bond ratio remains pretty much unchanged.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

Thanks!
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

Thank you!
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

This post documents the monthly return and asset class weights as of May 31, 2021 of the Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The May 2021 return of the Global Stock-and-Bond Portfolio was:
  • Global Stock-and-Bond Portfolio: ((60.56% X 1.58% (global stocks)) + (39.44% X 0.07% (global bonds))) = 0.98%
    • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
    • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return
As of May 31, 2021 the weights were:
  • Global stocks: $73,689,440 million USD Market cap -- 60.54%
    • FTSE Global All Cap Index (GEISLMS) -- Net MCap
  • Global bonds: $48,026,260 million USD Market cap -- 39.46%
    • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value
For practical investing purpose I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its May 2021 return was 1.03%.
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

watchnerd wrote: Fri Jun 25, 2021 6:46 pm
guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Yeah, I couldn't find anything there...haven't looked anywhere else.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

guppyguy wrote: Fri Jun 25, 2021 6:57 pm
watchnerd wrote: Fri Jun 25, 2021 6:46 pm
guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Yeah, I couldn't find anything there...haven't looked anywhere else.
In the Financial Engines book, you pick a risk number and they built a portfolio from your available funds to produce that risk, but the fund risks needed to be recalculated monthly by FE.

You could email Bill, and ask for a reference article, or whatever. He responds in a helpful manner.
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

pascalwager wrote: Fri Jun 25, 2021 8:49 pm
guppyguy wrote: Fri Jun 25, 2021 6:57 pm
watchnerd wrote: Fri Jun 25, 2021 6:46 pm
guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Yeah, I couldn't find anything there...haven't looked anywhere else.
In the Financial Engines book, you pick a risk number and they built a portfolio from your available funds to produce that risk, but the fund risks needed to be recalculated monthly by FE.

You could email Bill, and ask for a reference article, or whatever. He responds in a helpful manner.
Where would I find this Financial Engines book?
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

guppyguy wrote: Fri Jun 25, 2021 10:06 pm
pascalwager wrote: Fri Jun 25, 2021 8:49 pm
guppyguy wrote: Fri Jun 25, 2021 6:57 pm
watchnerd wrote: Fri Jun 25, 2021 6:46 pm
guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Yeah, I couldn't find anything there...haven't looked anywhere else.
In the Financial Engines book, you pick a risk number and they built a portfolio from your available funds to produce that risk, but the fund risks needed to be recalculated monthly by FE.

You could email Bill, and ask for a reference article, or whatever. He responds in a helpful manner.
Where would I find this Financial Engines book?
Kindle Reader. That's what I have.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

RISMAT is specifically intended for "many retirees".

WBS portfolio plus TIPS on the side.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

guppyguy wrote: Fri Jun 25, 2021 10:06 pm
pascalwager wrote: Fri Jun 25, 2021 8:49 pm
guppyguy wrote: Fri Jun 25, 2021 6:57 pm
watchnerd wrote: Fri Jun 25, 2021 6:46 pm
guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
Short answer:

He doesn't really get into life cycle investing much in the RISMAT series.
Yeah, I couldn't find anything there...haven't looked anywhere else.
In the Financial Engines book, you pick a risk number and they built a portfolio from your available funds to produce that risk, but the fund risks needed to be recalculated monthly by FE.

You could email Bill, and ask for a reference article, or whatever. He responds in a helpful manner.
Where would I find this Financial Engines book?
The Intelligent Portfolio by Christopher Jones
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

pascalwager wrote: Fri Jun 25, 2021 10:56 pm
WBS portfolio plus TIPS on the side.
That's what I'm doing.

Or, rather, will be doing once retired.

TIPS ladder already 88% funded (have to wait for some new issues).
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

guppyguy wrote: Fri Jun 25, 2021 6:40 pm Does Sharpe's preferred portfolio make any consideration for life cycle/human capital or does he advocate holding the floating market weights (stocks/bonds) at all ages?

If I include a good estimate of the NPV of my future contributions I am about 75% funded. Setting my Samuelson-share to the current floating global stock allocation (say 60%) that leaves me with 15% of funds available for the bond side. I could pro-rate that 15% to include weightings of N-fund assets accordingly or stick with all BNDW.

Is this a crazy implementation of two different ideas?

Just wondering if anybody else has been down this rabbit path.....
The market portfolio approach is compatible with lifecycle investing. The market portfolio picks out an efficient allocation of risk that you should target... but in order to target it, you also have to consider your existing risk allocation -- from your current portfolio, your remaining human capital, your mortgage, etc. -- and then tack on what's missing. (The reason I mention this is that viewing the market portfolio in terms of target risk plays a role below in refining the lifecycle strategy beyond the basic stock vs bond allocation ratio.)

When considering human capital, the largest first-order effect is probably the stock vs bond ratio. Here's Gordon Irlam's simplified approach to solving this problem: https://www.aacalc.com/docs/simple_rules. (edit: You should replace his baseline choice of 50% stocks in his formula with the current global market portfolio allocation to stocks.)

Going beyond stock vs bond ratio... If you think about it, human capital dries up after retirement. So human capital replaces only those bonds whose maturity is less than your retirement horizon. So even if you have large human capital right now, you should still own bonds whose maturity is further out than your estimated retirement. So a theoretically better way to transition to the market allocation of bonds over time would be to own long-term bonds first, and then fill out intermediate bonds and then short-term bonds as you get closer to retirement. This is consistent with vineviz's advice. But on the practical side, it is annoying to manage three separate US bond funds in market proportions, and Vanguard does not offer long-, intermediate- and short-term split for international bonds. So the headache factor is high.

edit: Btw, Sharpe himself has a similar position on combining lifecycle investing with market weighting. Here's an interview called Allocate by Market Weight (And Adjust for Personal Circumstances). You can enter any email address to view the full article. He touches upon human capital and glide paths.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

An employment contract isn't a bond! This has been explained in an earlier post. Just ask those who lost their job during the pandemic.

Bonds and stocks are marketable securities. Their prices fluctuate according to the Law of supply and demand. Thanks to Sharpe's theorem we know that the (free float) Global Stock-and-Bond Portfolio is a good starting point for asset allocation. The additional risks of investing into foreign assets (political, etc.) justify the moderate home bias found in Vanguard's LifeStrategy Moderate Growth Fund (VSMGX).

I think that using a sensible plan during accumulation with VSMGX is good enough. I also think that using a similar sensible plan during retirement with VSMGX and non-portfolio income such as Social security (current or delayed), work pension (if any), and (if necessary) an inflation-indexed SPIA* is good enough.

* Single Premium Immediate Annuity.
Last edited by longinvest on Sat Jun 26, 2021 8:27 am, edited 1 time in total.
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

I'll add that a Treasury Inflation-Protected Security (TIPS) is a marketable security with a fluctuating market price. It promises to make specific CPI-U-indexed coupon payments and final principal payment on specific dates. It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Most people who lost their jobs in the pandemic will probably work and earn money again. Of course, nobody could claim that a job and a bond are perfect substitutes. But to ignore human capital / future income expectations is to ignore the most significant asset possessed by most people who are in their prime earning years.

Relatedly, I'm curious how you are able to justify the specific quantities of home bias in your VSMGX recommendation when home bias, political risk, etc. are at least as (and arguably more) murky and hard-to-quantify as human capital. When adjusting for personal circumstance, why is it acceptable to handwave away the adjustment for home bias but not acceptable to adjust for a personal's expected future income? (Keep in mind that one can factor in job loss into "expected future income".)
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

Dear Djm2001,

I think that my earlier post provided clear enough explanations.

Best regards,

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

longinvest wrote: Sat Jun 26, 2021 8:02 am It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
Well, that depends on how many TIPS you have and how long your TIPS ladder extends into the future.

It's a pretty decent proxy.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

watchnerd wrote: Sat Jun 26, 2021 10:59 am
longinvest wrote: Sat Jun 26, 2021 8:02 am It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
Well, that depends on how many TIPS you have and how long your TIPS ladder extends into the future.

It's a pretty decent proxy.
Dear Watchnerd,

You've cut an important part of my short post. Here's the entire post:
longinvest wrote: Sat Jun 26, 2021 8:02 am I'll add that a Treasury Inflation-Protected Security (TIPS) is a marketable security with a fluctuating market price. It promises to make specific CPI-U-indexed coupon payments and final principal payment on specific dates. It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
The longest TIPS are issued with a 30-year maturity. During the early years of a long TIPS, its market price can be quite volatile.The known oldest humans lived to near age 125. A retiree of age (120 - 30) = 90 is likely to find that it's financially more efficient to buy an inflation-indexed SPIA* to provide the desired income and leave the remaining liquidity in a global stock-and-bond portfolio.

* Single Premium Immediate Annuity.

Best regards,

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

longinvest wrote: Sat Jun 26, 2021 11:20 am
watchnerd wrote: Sat Jun 26, 2021 10:59 am
longinvest wrote: Sat Jun 26, 2021 8:02 am It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
Well, that depends on how many TIPS you have and how long your TIPS ladder extends into the future.

It's a pretty decent proxy.
Dear Watchnerd,

You've cut an important part of my short post. Here's the entire post:
longinvest wrote: Sat Jun 26, 2021 8:02 am I'll add that a Treasury Inflation-Protected Security (TIPS) is a marketable security with a fluctuating market price. It promises to make specific CPI-U-indexed coupon payments and final principal payment on specific dates. It doesn't promise to make fixed inflation-indexed payments until the investor's (or spouse) death. A TIPS isn't an inflation-indexed pension.
The longest TIPS are issued with a 30-year maturity. During the early years of a long TIPS, its market price can be quite volatile.The known oldest humans lived to near age 125. A retiree of age (120 - 30) = 90 is likely to find that it's financially more efficient to buy an inflation-indexed SPIA* to provide the desired income and leave the remaining liquidity in a global stock-and-bond portfolio.

* Single Premium Immediate Annuity.

Best regards,

longinvest
I cut it because your logic makes no sense.

A non-rolling ladder of TIPS can be extended infinity into the future. You just keep buying new ones as they're issued.

And the volatility is irrelevant if you're consuming them as income.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
guppyguy
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

longinvest wrote: Sat Jun 26, 2021 7:49 am An employment contract isn't a bond! This has been explained in an earlier post. Just ask those who lost their job during the pandemic.

Bonds and stocks are marketable securities. Their prices fluctuate according to the Law of supply and demand. Thanks to Sharpe's theorem we know that the (free float) Global Stock-and-Bond Portfolio is a good starting point for asset allocation. The additional risks of investing into foreign assets (political, etc.) justify the moderate home bias found in Vanguard's LifeStrategy Moderate Growth Fund (VSMGX).

* Single Premium Immediate Annuity.
I tend to agree. Even in my situation where I am part of a seniority list with known hourly rates and a mandatory retirement age there is still ambiguity in marking human capital to market. What if I want to retire 5 years early or work extra hours or what if we take a concessionary contract due to the highly cyclical nature of my industry? So its a bit nebulous, even though I can come up with a good estimation. Its like trying to nail down a target retirement portfolio value or future required expenses, just because something can be theoretically measured with great precision doesn't mean that it is absence of noise and varying personal feelings (somedays I want to retire next year...do I change my AA??). It might be useful but fraught with bias.

The other problem with treating HC as bond like is that it is not liquid and readily available for rebalancing (if one rebalanced).

So I like the simplicity of WBS, the problem is my current portfolio is closer to 80/20 (no HC included) but is large enough that I could replace 100% of our income at 3% SWR and pensions (if I could receive them today). Only about 25% of my HC is remaining...I'm already more then half way out of the cave.

If I know I want to end up with a WBS portfolio with a side of TIPS/IBonds for certain liabilities (delaying SS or replacing it in early retirement) how do I get there mathematically? One would think that total portfolio assets in relation to future consumption needs would/should drive deviations from a WBS AA, not age. Age or time to retirement is only a second order correlation.
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spdoublebass
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Re: Bill Sharpe's preferred portfolio

Post by spdoublebass »

watchnerd wrote: Sat Jun 26, 2021 10:59 am
Well, that depends on how many TIPS you have and how long your TIPS ladder extends into the future.
Watchnerd,
I know you said somewhere else, but I can't remember. Is your TIPS ladder with individual TIPS or with a TIPS fund? When people say "ladder" it usually means individual TIPS right?
Just curious. Thanks.
I'm trying to think, but nothing happens
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watchnerd
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

spdoublebass wrote: Sat Jun 26, 2021 1:41 pm
watchnerd wrote: Sat Jun 26, 2021 10:59 am
Well, that depends on how many TIPS you have and how long your TIPS ladder extends into the future.
Watchnerd,
I know you said somewhere else, but I can't remember. Is your TIPS ladder with individual TIPS or with a TIPS fund? When people say "ladder" it usually means individual TIPS right?
Just curious. Thanks.
The ladder-proper is individual TIPS and STRIPS in alternating rungs.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Sharpe's World Bond/Stock portfolio snapshot as of end of day, Jun 30, 2021:

4-fund:

Code: Select all

	 	 INDEX MKT CAP ($M)	%
VTSAX/VTI	 $ 43,420,769.89 	35.27%
VTIAX/VXUS	 $ 31,014,738.82 	25.20%
VBTLX/BND	 $ 22,620,813.45 	18.38%
VTABX/BNDX	 $ 26,036,197.35 	21.15%
2-fund:

Code: Select all

	 INDEX MKT CAP ($M)	%
VT	 $ 73,261,427.76 	60.09%
BNDW	 $ 48,648,327.17 	39.91%
Source: Real-time tracker.

Methodology: Same as before.

In case you're wondering about the difference between these monthly posts and longinvest's monthly posts, the answer is that the numbers in this post are forward projections calculated at month end before the new factsheets are released. In constrast, longinvest waits for the new factsheets to be released (which usually takes several days) and then reports the new factsheet numbers directly. Both results are pretty close, indicating that Sharpe's forward-projection idea works well. Another difference is that longinvest uses the FTSE bond index market caps directly rather than try to compute the Bloomberg Barclay market caps (which BNDW actually tracks). Luckily, FTSE and (the inferred) Bloomberg Barclay market caps are very similar at the global level for bonds, and so the difference is negligible. (The difference would not be negligible if you drill down into the US vs international breakdown though.)

That said, I don't see much value in my posting these numbers each month since the primary goal of the posts was for a historical record, and longinvest's numbers are truer to the historical record. So I'll stop posting my numbers going forward. You can still always check the spreadsheet tracker linked above at any point to see the current computed allocation of Sharpe's portfolio.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
rcmoormt
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Re: Bill Sharpe's preferred portfolio

Post by rcmoormt »

Im slightly confused how to invest in this. I know your investments will roll with the market, so preexisting investments shouldn't really be an issue. Say the market tanks and the ratio is 40 stock 60 bonds. Does this mean future investments during this period should be allocated to 40/60 in order to keep global allocation as aligned as possible? One would think buy more stocks when they're on sale.
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Yes, once you're at market cap weights, you'd keep buying at market cap weights. That's also true of a 60/40 or 80/20 or any other target portfolio. If your portfolio is at target allocations, then your next dollar should be invested in the same allocations if your goal was to maintain that target. It's nothing special to the market portfolio in that respect.

I wonder if the root of your question is about contrarian investing -- i.e., deciding when you can successfully bet against the market. Frequently betting against the market might not work out well in the long run. Have you ever played the Stock Market Timing game? It was quite a fun exercise.

Or perhaps you're wondering if there's a rebalancing bonus for fixed/static allocation portfolios. The existence of a rebalancing bonus has been debatable.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
HootingSloth
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Re: Bill Sharpe's preferred portfolio

Post by HootingSloth »

rcmoormt wrote: Thu Jul 01, 2021 6:05 am Im slightly confused how to invest in this. I know your investments will roll with the market, so preexisting investments shouldn't really be an issue. Say the market tanks and the ratio is 40 stock 60 bonds. Does this mean future investments during this period should be allocated to 40/60 in order to keep global allocation as aligned as possible? One would think buy more stocks when they're on sale.
I think John Cochrane describes the logic well near the conclusion of his article "Portfolio advice for the multifactor world":
Do not forget, the average investor holds the market. If you’re pretty much average, all this thought
will lead you right back to holding the market index. To rationalize anything but the market portfolio, you
have to be different from the average investor in some identifiable way. The average investor sees some risk
in value stocks that counteracts their attractive average returns. Maybe you should too! Right now the average investor is feeling very wealthy and risk-tolerant, therefore stock prices have risen to unprecedented levels and expected stock returns look very low. It’s tempting to sell, but perhaps you’re feeling pretty wealthy and risk-tolerant as well.
Your question is just the other side of the same coin as the final point in that quote. If stocks fall dramatically it is because the average investor is experiencing something that makes them feel much less risk-tolerant. Maybe you are different from the average and can swoop in and buy stocks "on sale" because you don't mind the risk that everyone else is seeing. But, perhaps, you are feeling just as much fear as everyone else in that moment. When Japanese stocks started plummeting in the late 80s, I'm sure some investors thought they were being clever by buying at a discount. In that case, the fearful folks turned out to be right.

Cochrane's article goes into this kind of logic (and the alternative logic of market timing strategies and factor investing) in great depth, of you are interested in learning more.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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